Art's Way Manufacturing's (ARTW) CEO Carrie Majeski on Year End 2015 Financial Results - Earnings Call Transcript

| About: Art's-Way Manufacturing (ARTW)

Art's-Way Manufacturing Co., Inc. (NASDAQ:ARTW)

Year End 2015 Financial Results Conference Call

February 3, 2016, 11:00 AM ET

Executives

Carrie L. Majeski - President and Chief Executive Officer

Marc H. McConnell - Chairman of the Board of Directors

J. Ward McConnell - Vice Chairman of the Board of Directors

Dan Palmer - President of Art’s Way Scientific.

Analysts

Operator

Good morning, ladies and gentlemen. Today is Wednesday, February 3 and welcome to the Art’s Way Manufacturing Quarterly Investor Call. At this time, all participants are in a listen-only mode [Operator Instructions]

Your call leaders for today’s call are Carrie Majeski, President and Chief Executive Officer; Marc H. McConnell, Chairman of the Board of Directors of Art’s Way Manufacturing ; J. Ward McConnell, Jr., Vice Chairman of the Board of Directors of Art’s Way Manufacturing; and Dan Palmer, President of Art’s Way Scientific.

I'll now turn the call over to Ms. Majeski. You may begin.

Carrie L. Majeski

Good morning, I’m going to start with the Forward-Looking Statements. You should note that some of the statements made during this call may be considered forward-looking statements. Forward-looking statements include, but are not limited to, statements relating to our market position, strategies for growth, and future results of operation.

Forward-looking statements are inherently subject to risks and uncertainties such as competitive factors, difficulties, delays in development, manufacturing, marketing and sales of Art’s Way products, general economic conditions, and other risks and uncertainties described in Art’s Way’s periodic reports filed with the Securities and Exchange Commission. Actual results may differ materially from anticipated results and Art’s Way does not undertake to update these forward-looking statements.

With that I'm going to turn the call over to Marc so he can greet.

Marc H. McConnell

Yes, well I would like to welcome everybody to the call, we appreciate your support and interest in the company. And obviously a very interesting and challenging year in 2015, we'll be getting into some of the details on that and that we'll be talking about some of what we look forward to 2016.

So thank you for being here and I'll let Carrie go through part of the presentation.

Carrie L. Majeski

Alright, thank you, Marc. We are changing up our format a little bit with this call and giving less detailed numbers, but I'm going to start with just a few numbers for the consolidated year-end income statement for Art’s Way Manufacturing.

Our sales for the year were $27.936 million compared to $36.170 million. It was a decrease of $8.234 million or 22%. Our income or loss before taxes for 2015 was $865,000 loss compared to earnings of $1.303 million in 2014. That was a decrease of $2.168 million. Our backlog consolidated as of today is sitting at $5.78 million compared to $7.814 million a year ago that is a 35% decline or $2.7 million.

One thing that we would like to point out on our year end income statement is when you look at general and administrative expenses, they do show an increase of $532,000 or 12%. And as we go through our presentation we will talk a lot about all the things that we have done to kind of restructure our business and reduce costs.

And that seems a little bit odd when you look at that and see that large increase in the G&A, but would like to point out again that that is due to the impairment of goodwill at UHC and that impairment number was $618,000. So when you offset that against our increase and general and administrative costs, we do show a reduction in general and administrative cost.

We would also like to point out that our gross margins stayed pretty consistent year-on-year despite the difficult economic conditions. Our gross margins for 2015 were 25% on the consolidated basis compared to 24% in the prior year. We did generate operating loss of $404,000 and our net loss for the year before taxes was $558,000. Our earnings per share was at a negative $0.14.

We did pay dividends of $0.05 per share last February. Through the last six months of the year, we worked very diligently on restructuring and we did accumulate $920,000 in one-time charges and restructuring costs to do so. So we should see a significant impact as we go into 2016 with those restructurings in place.

One other thing to note is that we do have impending sale on our Ames facility, which we moved out of in the second half of 2015. That sale is slated to close on February 10, just shy of $1.2 million. We have also reduced our liabilities in 2015 by almost $800,000 and most of that reduction was due to operating liabilities and deferred tax liability reductions.

As we went through all of our cost restructuring, we were hoping to have a breakeven in the fourth quarter, we did fall a little bit shy on that. We were still working October and September to do some of those restructuring and then in November we did have a breakeven month so that makes us optimistic as we move forward into 2016.

I'm going to talk now just about the agricultural product lines, our sales for that division was $20.756 million compared to $26.952 million in the prior year, a 26% decrease. Our income before taxes was a loss of $438,000 compared to income of $1.8 million in the prior year. Our backlog as of today on just the agricultural products is $3.5 million compared to $7.1 million in the prior year, just 50% reduction in our backlog.

Our sales for the agricultural product lines were down 25% year-on-year, the largest decline was due to UHC, Universal Harvester Company in Ames and they sold directly to OEM customers for self-propelled combines and of course we all know that CASE, John Deere, EDCO all the major players had big reductions in the self-propelled equipment this year.

So we saw a decrease in sales of $2.4 million for that entity alone or 71%. Our beet harvester sales were also down $706,000 or 24% in the year. And that's primarily due to a decrease of one self-propelled sugar beet harvester and again, I would just note that the self propelled beet harvesters we do not manufacture they are a pass through item for us. So even with the reduced reduction in sales, the impact of income is significantly less than if it was the manufactured product.

Our forage equipment also was down significantly at 31% or $736,000. We are pleased that we were able to maintain our gross margins throughout the year. Last year, our gross margins were 25.6% and we ended the year at 25.6% for 2015. So despite the difficult economic conditions we are pleased that we were able to maintain those gross margins.

Our efficiency rates remained strong in Armstrong, which impacts that gross margin significantly. We’ve been very creative with our work force, we’ve had reduced hours, we’ve reduced our headcount. So we’re pleased that we were able to maintain and increase our efficiency rates despite the negative impact on our employees.

In the second half of the year, we really focused on the restructuring. We closed our UHC facility that was located at Ames and relocated that production to Armstrong. And we have also got the sale pending on the Ames building. We also did a temporary shutdown of our West Union facility and we just last week determined that we’re going to extend that shutdown through the end of 2016, so that we can continue to reduce our operating expenses of our manufacturing facilities.

We are going to continue to manufacture the products that were made in West Union, we will be shifting that work back to our facility here in Armstrong. We also moved our Art’s Way international facility from Clifford, Ontario to Listowel, Ontario.

Key reductions that we had in the second half of the year was a plant manager at our West Union facility, the General Manger at our Art’s Way international facility. That one did come with a severance package and we also ran a voluntary retirement program for our employees here in Armstrong that had a net cost to us of $30,000. Our staff is down nearly 50 people from November of 2014.

We anticipate sales in the first quarter and second quarter of 2016 to be down year-over-year in comparison, but in the second half of 2016, we believe that we should be pretty comparable to the second half of 2015. If you recall, we did have a strong first half of the year, it's really in the second half of the year that we depleted our backlogs and we saw the decline in sales.

Just want to talk a little bit about the significant decrease in our backlog. The key decreases in the backlog is one self propelled beet harvester, which again is just a pass through item for us. Our OEM silage blowers, their sales are down about $0.5 million. UHC is down $150,000. Our manufactured beet equipment is down two defoliators and a beet harvesters so that’s about quarter of million dollar.

Our year end orders did exceed our expectations that it was a stronger ordering period than we would have anticipated based on the sales level from the second half of the year. So we are pleased about that and we are pleased that the items that did sell do have a strong gross margin for us. So we’re moving forward into 2016 with a pretty positive outlook. We released the news release last week announcing our show schedule and are very excited to turn the page and work on 2016.

Next, I’m going to move into Art’s Way Scientific. Their sales for 2015 were $3.191 billion compared to $2.965 billion, then an increase of sales of 7.6%. Their income for the year was $124,000 compared to a loss of $165,000 in the prior year. And their backlog is currently sitting at $686,000 compared to $341,000 in the prior year. Most of the increase that Scientific saw in their sales in 2015 did come from agricultural buildings.

And one other thing that I would like to point out about Art’s Way Scientific and their income numbers is. we did settle outstanding legal claim. We had engaged a engineering firm on a Texas A&M job. And they failed to design the job properly which we ended up having to incur additional expenses to get the HVAC system functioning properly, but we had a legal claim against them and we received a settlement of $210,000 in the second half of the year. So that does impact our income numbers for the year.

We do have a strong backlog at Art’s Way Scientific right now, most of which should move through in the first quarter. The second quarter is going to depend a little bit on when jobs drop, we are working on a number of those, but at this point the second quarter is a little bit up in the air for us depending on when those orders are going to drop.

And with that we do have Dan Palmer on the phone today. So I would just move the call over to Dan to add a few words about, Scientific division.

Dan Palmer

Thanks, Carrie. I'm optimistic going into 2016 particularly because of the marketing efforts that we've put in. in spite of the restructuring and the cost reductions that Carrie mentioned earlier, we were still able to get out there in our Ag sector where we saw some growth potential in swine and calf confinement buildings and were able to continue to support the trade events and the shows and the advertising that we were doing in.

So the final report is just really strong right now. Thanks to guys in the shop Carol, Scott, John all working diligently to track the leads and helping this effort to try to make sure that we get back to potential clients just as quickly as possible so the teams is all working towards trying to close orders. We're tracking 295 building links right now and we moved through 66 of those in the last three months, qualifying, disqualifying, bidding, winning, losing those bids. So we're focused right now in trying to bring some business into the shops.

However, we were fortunate in the final quarter of the year to be able to bring in 10 modular agricultural building projects and seven of those were for swine buildings, three for our Calf Care units and those 10 projects totaled up 19 building sections. One of those projects was for a Jersey S&S Jerseyland in Wisconsin and the project included seven of our 60 head calf barns that were being incorporated into a complex, which included some site constructed parts of the project.

It was a nice adaptation of our traditional buildings and have given some other folks some ideas on how to get used to both agricultural space incorporated into something that doesn’t look like a modular building. That project was valued at around $810,000 and we're doing well. We also completed our first modular food safety lab for Eurofins in the fourth quarter and that went to food additive plant in Georgia.

We've met representatives at Eurofins and they love the project and continue to - they want to co-market and work on other projects of similar - bring the laboratory samples rather than take the samples to the laboratory. And have provided us access to their directorial market for coordinated press releases and support of two large food safety shows that we'll do.

So I think the outlook is good, I guess I also wanted to say that in taking care of our fourth quarter we were pleased to be able to preserve some of the work force at West Union, we have them come over to Monona. We work together, try to accelerate production, get some things to our clients and that overall had a positive impact.

So the massive trump here is that it wasn't all about cutting, we were doing everything that we possibly could to try to move product to the customer quickly, just to keep our service levels up and be more responsive to new release.

So with that I will turn it back over to Carrie.

Carrie L. Majeski

Thank you, Dan. I'm going to move into our tool segment with Ohio Metal. Their sales for 2015 were $2.379 million compared to $3.517 million that’s a 32% decrease for the year. Their gross profits did increase however, gross margins for 2015 were 26.6% versus 25.9%. So again able to preserve those margins despite the tough economic conditions.

Our loss before taxes at Ohio for 2015 was $197,000 compared to a loss of $33,000 in the prior year. Our backlog at Ohio Metal is currently sitting at $156,000 compared to $235,000 a year ago. We do attribute most of the decrease in sales at Ohio Metal due to the decline in the oil and gas industry, much of our tools go into pipe cutting for that industry, though was a significant decrease in that industry with decrease in our sales as well.

At Ohio we've also worked diligently and controlling our costs there and reducing costs, in 2015 we eliminated two high salaries, our President was eliminated from that position in early January and then we also had kind of a VP of Engineering that was eliminated late in the year.

So some significant management changes there, we have hired a key individual from the industry that has strong engineering and sales background and our focus is really going to be expanding the PCD and CBN markets. That's where we see that business going away from the standard tools that will be affected more by the oil and gas industry.

We were also able to make some changes in our health insurance plans. If you recall, we were on a self-funded health insurance and really we're not able to control both costs at all. We have not gotten all of the employees on more of a traditional health insurance plan and we should see significant decreases in our health insurance as we go forward.

Now I'm going to move on to our vessels segment, their sales for 2015 were $1.610 million compared to $1.736 million, they had a 7% decrease, their loss before tax was $354,000 compared to $341,000 in the prior year. Their backlog right now is sitting at $700,000 compared to a $129,000 in the previous year.

So, while their sales remain flat in 2015, we do have a really strong backlog right now and we'll see a pretty decent first quarter of the year and second quarter based on just the backlog that we have on hand right now. In prior years we really fluctuated with customer satisfaction and delivery and we had built up this backlog and then we would struggle getting it out and then we would irritate those customers and then we wouldn’t see the quotes coming back and again.

So we've really worked hard over the last couple of years to improve our quality, improve our delivery and to try to have a consistent customer base with repeat orders and increase in the number of customers that we had and we've definitely seen some positive changes along those lines in 2015.

We've also seen some improvements in our efficiencies, our margins. Capacity planning has been a big one for us this year. Planning was going on through that shop floors so we can tell those customers what our expectations are for delivery timelines, has been greatly improved over the last year.

We've also made some significant changes to our management at Art's Way Vessels. We have a new production manager that just recently started and we think that that's going to make a significant difference for us there and Pat O'Neil our sales manager has pulled back on his hours, he's still going to be working with us on a consulting basis. However, we are looking to hire a new sales manager to work out of the Dubuque facility on a full-time basis.

Next, I’m going to move into our corporate initiatives for 2016. Topping the list is increasing profitability across all entities. We believe a lot of the actions that we’ve already taken in 2015 are moving us in that direction, as well as the change to not reopen West Union at this time should help us significantly. Another initiative is to decrease our inventory by about 10%. Our main focus there is going to be in our Ag sector, where the majority of our inventory is. So that’s about $2 million reduction in inventory that we’re going after in 2016.

Debt reduction is another initiative for us. With the sale of the Ames building that should take place on February 10 that should bring down our debt by about $1.2 million. The payments that we’ll make throughout the year with the additional payments that we’ll be able to make without having the $1.2 million out on the loan, we should be able to have another $800,000 decrease along with the $1.2 million so looking at $2 million reduction in debt throughout the year.

Customer service is going to be a focus for us as we move forward into 2016. We definitely believe that in these though economic times that we need to be more customer driven, the customers are demanding more and we want to be able to deliver. Some of our primary focus is going to getting out and visiting our dealers, reacting to warranty claims faster, just reacting to our customer in a different manner than we have done traditionally.

And the last corporate initiative I would like to talk about is just being more forward looking in the last half of 2015. We were really playing defense and we’re not able to kind of have that forward-looking outlook. So that’s where our shift is going to be this year really looking forward what can we do, being able to position ourselves to take advantage of opportunities as they come.

And that concludes what I have prepared for today. So I’m going to turn the call over to Marc.

Marc H. McConnell

Thank you, Carrie. Well, obviously, as Carrie has described and as we’ve talked about in previous calls, 2015 was very challenging for us. We were kind of doing fairly well at checking along the first half of the year and things got quite really fast. So it took us a while to be able to react and enact the changes necessary to help our bottom line.

And as Carrie said in the fourth quarter September and October were still seeing the losses from November where we were finally starting to see more of the benefit of it and actually we did have a profitable November which was aided by the settlement leaving without that would been just over breakeven year. So to reach that point in November we are very pleased.

So we’ve had a lot of focus in sales in 2015 on the health of the business in terms of our borrowings and adjusting to a new level of demand that we might have to withstand for some period of time. Those efforts in cost cutting and adjusting continue, there are things that we’ve decided that the benefit will still continue to come. So first quarter we don’t yet have all those benefits really in effect yet, this will be an ongoing thing and it needs to be an ongoing thing for as long as sales are in lower level than they had been in the prior years.

So as Carrie said, 2015 just due to circumstances we had to play a lot of defense and going into the New Year, while we still have a lot of housekeeping to take care of, we really want to be able to be in a position to play offense too. Take advantage of opportunities that come along; look at strategic things that we can pursue and we are doing that.

So, it is good that we managed to reduce our liabilities fairly significantly and have further reductions coming and all that keeps us in a more healthy stance with the bank and overall and keeps us away from being too vulnerable to be aggressive in the marketplace. As Dan mentioned we are being more aggressive on the marketing side. We are really as it pertains to scientific doing some big things this year and I would say that if we were in a more vulnerable financial position we wouldn’t be able to do that.

So we're very excited about a lot of work we're pursuing on that front and on some others. We are also focusing on bring in key talent in some of these areas. We have a new Director of Sales and Marketing for the Ag that we are very excited about, it's a very big step up from anyone that we've had in that position before. That’s part of us moving towards, more focused on customer service and the whole customer interface.

Carrie talked about how in challenging it's all the more important to do that but really is a philosophy and culture going forward, not just in tough times but in good times. This is part of our focus for the long-term, which we much more focus on customers and how we treat them, ultimately I think that leads to more stable business and better margins and just a better business overall. So that is a big thing, it's not a here and now this year kind of thing, it's long-term.

As Carrie has alluded to, we've had really a lot of tough decisions to make during the year, the headcount has come down by around 50 over that period of time, there has just been a lot of those un-fun kinds of things that we had to do to adjust to the lower level of demand during the year. And we're really happy to have most of that behind us even though some of those efforts will have to continue cost wise, but really we're happy to be going into a new year and to be looking forward to opportunities to improve our business and to make money, focus on making money not just losing it.

So with that we're consciously optimistic for the year. I've said that in the press release, there are a lot of things for us to be optimistic about, there are things to make us cautious as well, just in general the market is not back and great, with our current cost structure we don't need the revenue we use to make money. So we're going ahead, it's a new year and we think that good things could lie ahead for us and we're trying to put ourselves in a position to take advantage of that.

So with that I would open it up to any questions and also Ward McConnell is here and available on the call, if anyone would like to ask him anything else. So Q&A is open.

Question-and-Answer Session

Operator

Ladies and gentlemen, at this time we will conduct the question-and-answer session [Operator Instructions] Our first question comes from [Sam Rebotsky] (Ph). Please say your question.

Unidentified Analyst

Yes hi good morning Marc and Carrie and Dan and Ward.

Marc H. McConnell

Good morning.

Unidentified Analyst

So you have sort of set the stage to sort of reduced losses and turn to profitability. The sale of the building at a $1.2 million, this got get booked us a gain or a breakeven or profit, what is the story there?

Marc H. McConnell

It's pretty close to breakeven. It would be a small gain offset by some of the fees associated with doing it, so it's kind of a wash in that respect. It is significant however on an ongoing basis, I mean our payments on the one that we'll be paying off for something like [425] (Ph) a month annually around 510, it's quite a significant debt service to carry and then also all the costs associated with owning it like insurance , property tax all that. And we’re going to have a pretty good improvement not just with cash flow but to the bottom line in terms of interest and other carrying costs would not have been part of us anymore.

Unidentified Analyst

So would you say that 300,000 for the year, is that low or high for the carrying costs, but since it's not been utilized?

Marc H. McConnell

Let’s see, I would say that would probably be a bit high. I think the non debt service related carrying costs are probably around 10 a month or something like that maybe a little more and then I'm not sure of the payment how much of that is interest, but I think it would be probably between two-ish. Carrie do you have a better number than that?

Carrie L. Majeski

No, I think you are right in there Marc.

Marc H. McConnell

Okay.

Unidentified Analyst

So the fourth quarter shows a loss of $0.04 versus a profit of $0.09. Is this quarter supposed to be your better quarter, which on a ranking the four quarters, how would you rank this quarter?

Marc H. McConnell

Carrie would you speak to that?

Carrie L. Majeski

I think that the first quarter should be okay for us. We haven’t had a lot of sales coming in since our quarter our early order program ended. However, we are still making soil grinders everyday which is a nice margin product for us and we’re also working on our OEM silage blowers. And those are out of bill and hold arrangement. And so right now, we’re projecting that we should have all of those OEM blowers manufactured in the first quarter. So that should definitely have a positive impact on our first quarter.

Marc H. McConnell

And then historically I think the fourth quarter has some unique challenges. The number of work days in December versus expenses, a lot of times that makes hard to make any money towards the end of the year and that kind of thing. So fourth quarter there is often challenges associated with it.

Unidentified Analyst

And the visibility at this point we see December is breakeven. Do we see a visibility when we would start to be profitable on a regular basis yet or breakeven?

Marc H. McConnell

I would say it’s real hard to say, I think January probably somewhat similar to December and going ahead it's really hard to say right now. I mean we do have some backlog that gives us some visibility, but it's hard to give you a real good answer.

Unidentified Analyst

Now the scientific I guess the hope was there would be some funds that there would be more funds in the scientific area with the universities. You have been doing buildings for the farms. Could you address what you are bidding on and what is available? Is it improving or is it the same or what would we say about that.

Marc H. McConnell

What I would say about that would be, to give you some statistics, we lost 11 projects in the last quarter, nine of those have been on price and two on converting from modular type construction to site built construction. So we in our scientific site have a very, very aggressive competitor right now. So what is out there and available is there are some public health work, veterans administration hospitals have some work that they are doing on modulars in order to bridge gaps and renovations. We are seeing some resurgence in the university type of work after the first of the year. We are also seeing and are optimistic about potential of food safety. So does that answer your question at a round up way?

Unidentified Analyst

I guess in other words are you bidding on projects, are there more opening up. I mean it's unfortunately you are not able to get modular - you are losing modular to some permanent structures, but is there any major projects that appear to be coming up, or is it the farm taking over from the universities in the..

Marc H. McConnell

No, not that at all. Not the farm taking of the university, some of the agricultural buildings are university related. They are doing work on agricultural animals, they are doing veterinary sciences and teaching people to be farm mangers. So we’re still in that. We haven’t totally gone for the individual producer. On the Calf Care side of the business, it seems like we need to have a dairy that’s like milking up thousand cows in order to make this thing actually feasible. So become multiple buildings rather than just a single 60 head barn. So we’re pursuing that based upon information that we get from progressive dairymen.

I think that Sam, I’m always so optimistic and I need to curve that a little as Carrie said in the forward-looking statements, there is a lot of activity right now. We have a lot of things on the annual report that we're working on, the interest in the products seems to be greater than they have been in of the last year, there is a lot of activity.

Unidentified Analyst

Okay that sounds good and Marc, I guess you are opportunistic in taking advantage of the low price of the stock, hopefully we see it improve and I guess before the - if the earnings improve and the losses get reduced. I guess the stock will improve and I guess hopefully just keep doing what you guys are doing and turn the company around. Good luck.

Marc H. McConnell

Thank you very much Sam.

Carrie L. Majeski

Thank you.

Dan Palmer

Operator

Our next question comes from [Roger Miller] (Ph). Please state your question.

Unidentified Analyst

Good morning.

Marc H. McConnell

Good morning.

Unidentified Analyst

Let's talk about Vessels, there seems to be a turnaround situation and you have got a nice backlog, I can't remember the backlog that would be in this high. So you have cleaned up your manufacturing, would you like to talk about that some of the inefficiencies. So where you are going forward with this?

Carrie L. Majeski

Mark I can speak about a little bit.

Marc H. McConnell

Okay.

Carrie L. Majeski

I mean, okay. Vessels has really had a lot more over side I guess from corporate and we've been taking some of our key employees from here down to vessels to help them get their processes in place. Larry Cornell left us in early December, so we're just starting off with a new production manager and when we were hiring that production manager, somebody that has experience with the shop floor and really recognize inefficiency as being an issue. When I go down there, leadership is really what they are lacking more than anything, they need somebody to help guide them and tell them what to do next. So that's really where just being out there and being part of that team I think it's going to be really important for us as we go forward.

Unidentified Analyst

So, you continue to lose substantial amount of funds when you consider how much the overall revenue is, when is that going to stop?

Marc H. McConnell

Well that's a age old question. I mean I think that one thing we expect - there are number things going on, we expect sales to be substantially better this and part of that’s because we're entering the year with a really strong backlog, activity is good. We have a lot more customers in terms of numbers than we had where as a year ago maybe we were dealing with three or four, now we're dealing with like 19 different customers with various jobs. So that's good.

So on that side things are improving and part of what we need to make money is actually to have more throughput I mean that's part of the equation. The manufacturing situation is a huge opportunity for us and we're very excited to have new and better talent in charge of that going forward, that's a big opportunity. Our sales situation in terms of personnel that's also an opportunity where we are recruiting right now for there.

So there are a lot of changes, I mean if we were entering the year and not making some substantial changes, it would be difficult for me to say that we expected much of a different outcome. But I would say that I think the information that is being used to run that place is far better than it has been and Carrie alluded to the capacity planning and all these things should be fairly basic manufacturing. We're just doing it a whole lot better and using the information around the business to quote better, to quote times better to plan the flow better.

All those things are fairly recent development. So there are a number of things that are different that give us reason to expect a better outcome and I would say in prior years we probably didn't have enough change in certain areas year-to-year to want a different outcome and I think this year that's different.

Unidentified Analyst

In petroleum industry, which I know you have tried to enter and I have read your website and you build these tanks for a number of industries. And the Web site is impressive, but nowhere does this state that you build smart tanks. Smart tanks are being used because the fact is there is less restrictions, less paper work and less worry. There is no set up cost, no power and no phone lines. Are you going to build smart tanks?

Marc H. McConnell

Well that’s an area that’s an opportunity that I don’t have a whole lot to report to you right now. There are a number of things, being in tank business there are all kinds of different angles and corners of the tank business. There are a lot of things that we could be doing and that’s an interesting one and that’s on our list of things to really look a lot further into.

Unidentified Analyst

Well, I would think that the farms would be interested in smart tanks too, not only the petroleum industry. And I know for a fact that Great Lakes Petroleum which is in about 12 different states on the East Coast and the Mid West are using smart tanks to lease and smart tanks that they own. And that seems to be very profitable business and I would urge you immediately to get the technology to increase your visibility in your tank business.

Marc H. McConnell

That is a good one and the recurring income aspect of that is particularly good I think.

Unidentified Analyst

And Great Lakes Petroleum is not in Iowa, so I don’t know what the concentration of smart tanks is in your core area. Furthermore, something has to be done with vessels, the shareholders have expressed this in the past and I don’t believe that division has ever been profitable. Is that correct?

Marc H. McConnell

No, it's very profitable in the first I believe two years.

Carrie L. Majeski

At 2006 and 2007 I believe.

Unidentified Analyst

Well, I believe the smart tank will make you profitable. Now your on demand tanks that you are doing, last conference call you stated that there was no demand for that. Is that still the case?

Marc H. McConnell

Well it hasn’t been enough to move the needle for us. There has been some, but we haven’t taken off.

Unidentified Analyst

Maybe with smart tanks and maybe using the cloud too you can get into present technology.

Marc H. McConnell

Yes, we have a lot more about that, but we’re eager to.

Unidentified Analyst

Well, there are so many technology companies are using the cloud now that I’m sure that one of them will jump into it. I was impressed with the amount of farm shows that you are doing this year. I pushed that on call after call to do more trade shows and it looks like you have got a full boat of shows with the Iowa Power Farming Show going on February 2 to 4, someone is attending that from your company. What is the initial reaction at the Iowa Power Farming Show right now?

Marc H. McConnell

Carrie can you report on that?

Carrie L. Majeski

Yes. Attendance has been late. We had a significant weather even here, there was a blizzard that went through this area. So, yesterday was not a good day for that show, we’ll find out more today.

Unidentified Analyst

Well, in the past I also urge you to take not only brochures but printed brochures from my background to the shows and to your customers and also some kind of advertising for vessels, I still believe the vessels can’t be sold through with the different divisions. Like scientific for instance could have a small display of brochures or something to do with vessels at the tradeshows. Have you decided to do that or…

Marc H. McConnell

We’re applicable I think, vessels I guess it's somewhat limited but…

Unidentified Analyst

Well, vessels is definitely limited, but with smart technology I believe that it could be sold through all the different divisions and I can see it being profitable. Basically in the Ag farming business what is the bright spot there?

Marc H. McConnell

Well I would say that I think we've come out of period where it can't be a lot worse, frankly. I mean, we've seen what happens when the orders really, really dry up and we're able to survive through that and adjust our business to it. And so to have a strong than expected early ordering period, the close down at yearend that was a good sign, most of it is livestock oriented and most that we have pretty good margins on. So those are bright spot.

As Carrie said, in the last of couple of weeks, the orders have been a little bit light, I would say it's probably not too surprising, since a lot of that comes at the end of December, but I think we're going as we've talked about end of the show season. We've got a big show next week, the North American Farm Machinery Show in Louisville, which is the biggest one that we participate in. and I think that’s when you kind of steering more interest on part of the end users and that kind of things. So we're optimistic and we know that we don't need as much revenues we use to make money. And we're adjusting and have adjusted to a great degree to lower level demand and we feel like we can still succeed there.

Unidentified Analyst

Are your grinders still performing well? Last year you came out with a new one and you previewed it, was it at the Louisville show?

Marc H. McConnell

Yes, the first appearance and that was at Louisville.

Unidentified Analyst

So, do you have new innovations or products this year that you want to expound on?

Marc H. McConnell

We don't have any all new ones to revel. That one is still pretty fresh and so we have some evolutionary changes and that kind of thing, we don't have a big new to make a splash like we did last year. But that one interestingly has done pretty well and it kind of built over time, demand for it better towards the end of the year than when it came first out that particular size.

Unidentified Analyst

Yes, I was surprised with the size of the unit itself. It exceeded all other grinders out there by quite a bit. Didn’t it?

Marc H. McConnell

Well for us it was an in-between size. They have kind of filled the hole where our only competition that market happen to be that middle size and so this kind of - in our view took away one last excuse for buying the other one.

Unidentified Analyst

Any acquisitions in the horizon that you want to expound on or not names of companies but areas that you may be interested in?

Marc H. McConnell

Well there is not much I can say other than we're open mind to looking at synergistic acquisitions. As we've said for a couple of years, I guess biggest focus acquisition would be to pair something with scientific that helps it grow, but it needs to be the right opportunity. And for other divisions, things come along that makes sense that fit us well that we could absorb in that kind of thing, we are open to. So we are looking at something, but I'm picky about it, I'll say that. They need to fit us and fit what we're doing and help us move forward with what we are doing. So, I don't have anything specific beyond that.

Unidentified Analyst

So exactly in West Union, what was manufactured there that you moved over to Armstrong?

Marc H. McConnell

Largely the Miller Pro branded hay and forage products. Like forage boxes with major thing over there and some other items.

Unidentified Analyst

So what are you going to do with that building? Is that just going to remain...

Marc H. McConnell

Well at least for the time being, we intend to continue with it and own it and not try to sell it. Part of that is that it provides for expansion opportunities in the future, some point in the market will turn another way. And we’ll have the space to go in there and do it. And it also provides us good coverage storage for things not to age outside. So it does help us in some ways that it's not reason enough to own it, but for the time being we intend to hang on to it. If we wanted to sell it, it probably take a while and be difficult. So we’re more comfortable with the idea of hedging our bet on future growth, maybe future acquisitions, future things that would cause us to need more space.

You will recall that we bought it in the first place a few years ago, because we had simply kind of outgrown Armstrong and we had too much in Armstrong and I would say not enough ability to take on new opportunities under that circumstance. And so we found this building in a couple of hours away and it was a very nice building and allowed us to continue to grow. I will say we operate more efficiently in Armstrong than ever did. Now we’re probably able to do more things better than we were at that time. And probably better managing the plant overall now than we were then. So if the same thing same circumstance came up today probably, it would take more demand than it did then to cause us to need more space.

Unidentified Analyst

I would like to talk about Canada, the difference in the dollar and manufacturing in Canada and what are the advantages and disadvantages? And you have a new plant there, so we’ve never really addressed that. What are the problems up in Canada or going forward do you see manufacturing in Canada increasing?

Marc H. McConnell

Well all the manufacturing that we do there now is for snow blowers and that’s; A, very seasonal; and B, it can adjust a lot from year-to-year depending on weather and whether or not there is big snow earlier in the year. So as far as manufacturing goes that’s what happens there. The dollar there allows us to sell more competitively in the U.S. But the thing that really got us into Canada in the first place was preserving our distribution of Art’s Way type products into Canada. And with the current exchange rate Canada doesn’t matter, I mean it not just not going to be able to overcome the price issue versus Canadian made products. So the currency issue has a major impact on something, I mean certainly Art’s Way hold it and Canada has a huge impact on. So that’s very good.

Unidentified Analyst

But you haven’t given any thought to manufacturing other items in Canada and then bringing them into the U.S.?

Marc H. McConnell

Well, we do give though to that, and we’ve just moved into new plant as we said. And we’re continuing to look at what else could we do there to maybe take advantage of the currency situation and ultimately help us overall. But getting our feet under snow. We just had our first season in the new plant and it's not a huge place at all. But I think it could probably allow us to do some other things and we’re exploring that now.

Unidentified Analyst

Cutting your debt by approximately $2 million is that correct? That’s what I heard.

Marc H. McConnell

Well 800 already and after to say a little bit close to two. But again that 800 was last year the 1.2 over this year and then further operating methods of paying down debt, which should bring us to another two this year. And also we have an initiative to reduce inventory significantly this year which would aid that as well. So I anticipate a meaningful movement in both our inventory in one direction and the borrowings in the other.

Unidentified Analyst

And where were you told that be?

Marc H. McConnell

At that point I think that, if we do really well it would be close to $10 million.

Unidentified Analyst

And with your revenue you should have no problem servicing that debt, is that correct?

Marc H. McConnell

Well, with the revenue that we think that this year could bring that’s right yes. And our debt service coverage is going to be a lot different after this building sales too. So from that standpoint we are in pretty good shape, we've looked at other financing and amortization schedules and things that we could go into to reduce our monthly debt service and actually just building sells, I think we're in a pretty good shape as far as that goes and don't need to do other measures to finance any differently.

Unidentified Analyst

Okay well, I haven't heard everything I wanted to hear today, but my expectations I'm sure are way above where we are presently and I would urge you to look at smart technology and go forward and hopefully on the next conference call you'll be able to address some of that specialties and vessels, because I believe that vessels and even maybe scientific have a use for them.

Marc H. McConnell

Yes, we will be learning more about that.

Unidentified Analyst

Thank you.

Marc H. McConnell

Thank you.

Operator

At this time we have no further questions.

Marc H. McConnell

Okay, well thank you again everyone for your interest and investment and support and questions and everything else. Really we've gone through very much what the difficult situation was last year and we do still face some challenges this year, but we've a lot of reasons to be optimistic and so we're taking every measure we can to make this a good year and look forward to speaking with you at the next call. Thank you.

Operator

That concludes today's conference call. Thank you for attending.

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